Declining Growth Stock Valuation?

Brushy Mountain Mining Company's ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 9% per year. If D0 = \$3 and rs = 10%, what is the value of Brushy Mountain Mining's stock? Round your answer to the nearest cent.

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• M
Lv 6
8 years ago

I'm not sure which model the problem wants you to use, but there are two approaches. The first is the dividend discount model (most popular) the other is the sum of perpetuities method. Here are some links for you:

http://en.wikipedia.org/wiki/Sum_of_Perpetuities_M...

http://en.wikipedia.org/wiki/Gordon_Growth_Model

You just need to plug in the numbers into the equations and you will have it. The trick is that the dividend is D0. You need D1 in the equations which means that you need to consider what the dividend is 1 year from now. Since the Dividends are falling at a rate of 9% per year, that's \$3*.91 = \$2.73.

rs is the discount rate.

Gordon Model:

2.73 / (.10 - (-.09))

= \$14.36

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6 years ago

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